The FT editorial provides a “fair and balanced” assessment of this initiative - here.
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93 Responses to “Draghi’s bold move in euro chess game”
The good aspect about this initiative is that Draghi has hardly set himelf up to fail with over the 7 years to go in his term.
Growth and reform remain key issues and with the prospect of no significant real growth in Ireland in 2014 and 2015, the Irish government will have to consider the risk of having to go cap-in-hand again after the hoopla of a 2013 return to market.
‘Many building blocks of an economic, financial and now political union of the euro area are dropping into place including completing the Single Market, especially in financial services – the delivery mechanism of the currency itself. However, the essential new ingredients creating a genuine euro area political union are the economic governance measures which are giving a collective oversight of the national economies – with powerful sanctions for misbehaviour’
That takes the proverbial biscuit. While there is much to be criticised in the conduct of state finances, it is the chicanery in the financial sector, and the generation of bogus profits by relentless private credit expansion which has really wrecked public trust. Given the pervasive infuence of money on politics, the sanctions for financial sector misbehaviour have naturally been a joke.
Spain and Italy face renewed pressure to accept euro zone bailouts after European Central Bank president Mario Draghi made this a precondition of bond market intervention to drive down their borrowing costs.
Meanwhile, Mr Draghi dismissed as “incorrect” a report in Der Spiegel that he asked ECB governors to consider a solution to Ireland’s banking debt issue that went beyond a “purely legal discussion”.
In a second setback for euro zone crisis countries, Mr Draghi said it was legally impossible for the European Stability Mechanism bailout fund to be granted a banking licence in its current form, allowing it to tap the ECB for potentially unlimited financing. “It is not up to us to give a banking licence to the ESM, it is up to governments,” he said. [...]
“It’s clear and it’s known that the Bundesbank have their reservations about the programme of buying bonds,” said Mr Draghi.
I thought that he was over-egging the pudding a bit myself until I read what he meant by “political union”.
“However, the essential new ingredients creating a genuine euro area political union are the economic governance measures which are giving a collective oversight of the national economies – with powerful sanctions for misbehaviour’.”
This is a definition reflecting the new reality. It is the implications of it that the reluctant leaders of Spain and Italy are refusing to face up to.
What Bishop is proposing seems closest to what is politically acceptable and the ECB (apart from Weidmann who has overplayed his hand, in my opinion) has now implicitly accepted some of the reasoning.
There are also major concessions to Germany, notably the limitation of the new supervisory arrangements to the largest “systemically important” banks.
As to the “proverbial biscuit”, rightous indignation is permissible. But even in this area, Bishop thinks - as do the authors of the ESBies proposal - that the fiction of allowing banks to treat government bonds as risk free and not requiring capital reserves has to be ended.
This whole sorry saga reminds me of the parallel domains of Theory and Practice. The Theory side is always ‘right’ - its based on assumptions (some plausible, some not), tight logical argument and some nifty math. Its never ‘wrong’. Except … … except when it hits the Practice domain. And that is what we have now. Tractable theory meets intractable practice.
Human nature being what it is, the steersmen will insist (Blyth-like) in beating to windward - until the crew refuse to go aloft and the vessel has to lay off and run downwind. Crew are not sufficiently p***ed off. While yet.
You cannot boost a physical system beyond its operating limits (well you can, but its inadvisable) and not expect some trouble. Our monetary system sits somewhat uncomfortably upon a physical-based economic system. This latter is malfunctioning so until it is adjusted back within its ’safe’ operating limits the monetary system will continue to malfunction also. The physical system is the power-unit, the monetary system the transmission unit. Both are knackered.
Is there a roadside ‘breakdown’ service available for the euro? Or has it to be towed to the Main Dealer repair shop?
The addition of ‘conditionality’ to the bond purchase process is designed to placate German politicos and allow Angela and Wolfgang to sell it locally notwithstanding the expected opposition from FDP and members of her own CDU/Bavarian coalition. If all other EZ politicos come on side then Herr Weidmann can be finessed. Could also lead to early general election in Germany if the loose cannon in the FDP (and a few other fundamentalists act on Nein) which might be no bad thing.
Asmussen is a pragmatist and signals suggest that he is also in favour of a ‘reasonable deal’ on Hibernia’s odious financial system debt.
This excerpt from the NYT article on solving the “Euro Puzzle” is relevant.
” Less ambitious, although based on a similar principle of not holding Germany liable for all debts, is Mr. Bishop’s plan.
Mr. Bishop, a former investment banker and adviser to the European Commission, represents the European League for Economic Cooperation, a group of entrepreneurs who support closer integration in Europe.
He has been pushing the idea of a euro zone fund of about 2.5 trillion euros that would issue a series of short-term debt securities to match the borrowing needs of all euro zone countries.
The member nations’ guarantees would follow the model of Europe’s current bailout vehicle, the European Financial Stability Facility, with Germany backing just 28 percent of the fund and thus not being obliged to pump in more money if a Spain or an Italy defaulted on its debts.
Some experts wonder whether these proposals, in their potentially daunting complexity, miss a larger point: that the euro zone sovereign debt crisis will not be resolved until Germany and other rich northern countries agree to accept the losses in the south through debt write-downs, whether by Greece, Ireland, Spain or Italy.”
Given the earlier decision by the German constitutional court that Germany’s liability must be quantifiable if it is not to be in breach of the budgetary prerogatives of the Bundestag as guaranteed by the Basic Law, this element would appear also to be a sine qua non.
Your comment nails it straight down the middle - in simple terms its either the German way or the highway.
Working on the assumption that the Italians et al don’t buy whats on offer what then? My view is that in such a scenario the euro by mathematics, not politics, will fail. The running costs of Italy et al will simply begin to spiral as the no growth austerity future has private investors running for German cover.
In addition the concept of the ESBies seems with every passing hour a significantly better option than virtually anything that has been proposed thus far its suprising that it hasn’t been debated in much more open manner as all other ’solutions’ seem to run into the same German cul de sac.
…and someone needs to start bringing this into public discourse in Ireland so that people are fully aware of the vista we all face, are we happy to be signed up to this - this is the manifestation of the Creighton vision - when we passed the fiscal treaty did people realise this was the next logical step.
Philip Lane opened a tread recently [only 7 comments] on the ideas of Landon Thomas and others. Worth anther perusal
Landon Thomas outlines some of the reform ideas doing the rounds in policy circles and profiles some of the key participants in this NYT article. He includes the ESBies idea proposed by our euro-nomics group and a member of our group Markus Brunnermeier, as well as Daniel Gros and Graham Bishop.
I am not entirely sure if it belongs in a post with this title heading but Hans-Werner Sinn makes his own proposal in this FT op-ed.
I responded as follows:
Sinn’s proposal would bust the Solidarity Principle into smithereens …. and would set the European Project back a generation …. the vulture funds would love it …
Full scale WEuro_Bonds appear to be a step too far for the Deutsche Mindset at this time …
ASBies and variations on the theme as proposed by two of the others have merit … and could probably be sold to German Citizenry by a strong Chancellor who would have to admit to telling porkiers on the real origin of the crisis to her citizenry [e.g german banks lending dosh to Greece so that Greece can buy a few German submarines]
Moves on the ESM/EFSF are prob more likely … a banking liscence with central supervision of ALL EZ financial institutions ….
Stepping back a litte - all of the above are designed in one way or other to Placate Gemany …. as distinct from being EZ driven ….
So over and above them all stands the imperative to provide a nEU Remit for the European Central Bank with the handcuffs of the bUndesbanke removed. Draghi can handle a Big Bazooka … what he can do without one is probably not enough …
surely this is all about buying time and allowing the political process to take its course? Actuary has it right that this is about the big countries, do they want a EU with full political union or not? Only France and Germany can decide that and ST ECBies ensure that this central fact cannot be kicked too far into the long grass on the one hand and that the markets don’t force a collapse, and therefore destroy the whole project, on the other.
Ireland’s choice is a) keep with the current plan and negotiate as much of the financial sector debt assumed by Govt as possible, but stay in the Euro, or b) abandon the Euro and rejoin with sterling. Personally, I find the second option to be extremely impractical and depressing to think about. Impractical because, if we shift course now, we will destroy any gains in productivity, we will be held liable for the debt assumed and we will signing up to an old fashioned, inflate it away policy while trying to hold a sterling link. Depressing because it would effectively mean we give up our sovereignty to the UK and in this environment that means effectively giving up our independence.
“Actuary has it right that this is about the big countries, do they want a EU with full political union or not? Only France and Germany can decide…”
Do you not think Irish people should have a right to decide whether they want full political union? What are the productivity gains we have achieved under the Euro btw…what about the competitive gains foregone by being part of a monetary union which places an artificially strong currency on Ireland? Why is rejoining sterling (who says they want us?) the only option other than staying in the Euro….why are you presuming that if we leave the euro this will not be accompanied by a significant restructuring of our debt or a complete default for that matter?
Ireland’s choice is a) keep with the current plan and negotiate as much of the financial sector debt assumed by Govt as possible, but stay in the Euro, or b) abandon the Euro and rejoin with sterling.
…it would effectively mean we give up our sovereignty to the UK and in this environment that means effectively giving up our independence.
This is a false choice.
Denmark and Sweden seems to manage just fine with their own currencies (though they are of course still pegged to the Euro) and our choking Sterling peg dated to a time when much more of our trade was with the UK. Being stuck in the Fiscal Compact and EMU with a sado-monetarist Germany mediated by a financial sector beholden ECB will remain a dangerous place for Ireland to be.
Lets not forget that the ECB, with German connivance, willingly reduced the well being of the next generation of Irish people to save the status quo in the European Financial sector and that this repellent and extremist organization seems set to be given even more power and responsibilities in the EU.
The problem starkly highlighted by the current crisis is that we are obliged to accept the fiscal and monetary policy preferences of a currently very economically right wing Germany (and its hangers on) while having no influence over them.
Since countries outside the Euro seem to be flourishing in a way that countries inside the Euro are not I think it is hard to oppose leaving it on the basis that it worsens our economic prospects.
Against that it might reduce our political influence in Europe, but that appears to have to hit a zero lower bound of a sort already.
What was extraordinary about Draghi’s speech last week was the direct, even loose, language that he used. Saying things like he would “do whatever it takes” and “believe me, it will be enough” is unusual for a Cental Banker, to say the least. In tandem, we had Nowotny saying that maybe the ESM should be given a banking license, which markets interpreted as paving the way for unlimited primary bond purchases, otherwise known as or quantitative easing.
All this led the markets to believe that Draghi was going to step beyond the spirit of the ECB’s mandate and use its balance sheet to finance governments and stimulate demand, a la the Fed and the BoE. What we got yesterday was a big fat slap down of any such notions.
Was Draghi blind to the expectations he was setting? I doubt it. Or was he deliberately setting expectations high so that Buba would be relieved when he under-delivered? Or was he giving the Germans a glimpse of what the bond market needs to be stabilised before retreating behind his mandate?
CMcC pointed out that Draghi now has a majority of 16 to 1. But they were voting on a very limited and conditional scheme that was not a game-changer in any meaningful way. Conditional short term bond purchases for a government in a bailout plan are not going to stabilise the bond market. Investors want to know that a Central Bank stands four-square behind the sovereign as in the UK or US. Investors can hedge against or are indifferent to inflation or debasement risk, they just want to know that they will get their money back.
The FT paraphrased Draghi’s position as “if governments do the right thing, then they will be looked after” by the ECB. Excuse me, but what does the “right thing” mean? Would the right thing involve paying off senior unsecured bondholders? What other ECB whims will governments have to bend to in the future to secure support and how will the “right thing” change when we have an ex-Bundesbanker in charge? This sort of unaccountable concentration of power is abominable.
The only fiscal solutions to the crisis would involve coordinated stimulus in the core to facilitate restructuring the south. As the German government has not been willing to play ball, the result has been a disaster. The only other solution is monetary, involving debasement, inflation and monetary financing of governments. The most depressing thing about yesterday is that it is becoming clearer that the Germans - the government on the fiscal front and Buba on the monetary front - would sooner let the Euro go to the wall than give up their economic ideology.
I think Alan Aherne on Prime Time put it very succinctly when he said that there is the set of possible solutions to the crisis and the set of measures that are acceptable to Germany and it is not clear that these sets intersect. I have always held a similar view, but up until yesterday I was under the illusion that eventually, when push came to shove, the Bundesbank would be sidelined. Now I am not so sure. It seems that the future of the continent lies in the hands of a small cadre of mostly unelected conservative ideologues in the Bundesbank, the FDP and the German establishment.
This isn’t chess - its poker - with “the markets” and the ECB swapping cards under the table trying to bluff the Germans. Or something like that..
Oh look Ms Merkel they’re still not happy says Goldman Draghi - what should we do now…? A pound of your flesh might sate them
With its ailing banks and sluggish economic growth, Slovenia threatens to become the next problem child in the European debt crisis. Ratings agency Moody’s has downgraded the country by three notches to just above junk status. Experts are predicting Ljubljana may soon need a bailout.
Fíve European Union member states have already sought bailout aid from the euro rescue fund. Is Slovenia about to become the sixth? Late Thursday evening, the US ratings agency Moody’s downgraded the country’s government bonds by three levels, shifting its previous A2 down to a Baa2, and threatened a further reduction in the future. The agency also changed Slovenia’s economic outlook to “negative.”
The small eastern European country’s sovereign bonds now stand just two notches above “junk” status, the level at which bonds go from being a solid investment to a purely speculative one.
Moody’s said it slashed the rating because of bad loans worth billions in the banking sector, government funding troubles and “substantial” risks to its financial system. Three of Slovenia’s biggest banks are now asking for capital injections from the state. The ratings agency also cited the swiftly rising interest rates on Slovenian government bonds as one factor in its decision.
Yeah, what do you mean by productivity gains?? Personally(though i dont except your premise) a loss of sovierignty to the auld enemy actually seems preferable to a loss of sovereignty to brussels. At least the brits have some interest in the well being and stability of Ireland, its not exactly clear that the Europeans have any such interest.
“The FT editorial provides a “fair and balanced” assessment of this initiative ”
There are serious questions to be asked about surrendering more sovereignty to Europe, but in relation to financial matters this is what I see.
In any Organization / Society / club / family there are “Rules of the House”.
If one wants to be part of the family, one has to obey the house rules, otherwise one has to make the decision to leave or you will be forced out.
Some mothers call it “Tough Love” when their child poses a serious threat to the family which can no longer be tolerated i.e. Drink, Drugs etc. The family member gets thrown out, and it is only then when they have hit rock bottom that they realise the foolishness of their ways.
We cannot expect NO changes to be made to the “house rules” considering the financial events since August 2007. When the tide went out and some countries were swimming naked, banks and property owners were “Highly Geared”.
During the Lira days in Italy, everybody was a millionaire, it cost a ridiculous amount of Lira to buy a loaf of bread.
Several times the Irish establishment were warned about runaway house prices and the threat it posed to Irish society. I believe the German Ambassador did not mince his words several years ago when giving a talk in which he mentioned several truths about Ireland.
Today with unemployment benefit running around 188 euro / week, do we really want to undergo a massive inflation cycle? It may be the simple answer, but is it only deferring the problem further down the tracks?
Will a loaf of bread cost 188 euro in 2030? Is that what we want?
I don’t have a index linked pension, my existing pension is down to 50% of what I have put in, it has been decimated, and unfortunately I am not the only one, there are millions like me who are looking a penury in retirement. The last 10 years have seen dreadful returns, and the next ten years are looking the same, so that could be 20 years of zero pension growth and the fund actually worth less than what I put in?
Mother Merkel is walking a tightrope, trying to keep the euro intact as it is but attempting to administer “Tough Love” but without the ultimate threat of ejection.
However with certain countries unable to produce more than they spend and I see Greece as a “totally hopeless case” then perhaps the act of ejection would be better for all concerned.
I see Ireland’s future membership of the euro as being very borderline.
I’m just sorry Ireland was not under the financial control of Berlin 12 years ago.
Political “Babboonry” has to stop. All parties have to knock heads together and ask themselves three questions.
1) Where are we now?
2) Where do we want to be in 30 years time?
3) How are we going to get there in the best interests of the euro project and its citizens?
Spanish 10-year yields back down again today, to around 6.75% (they were north of 7.5% before Draghi’s comments in London last week)…5-year yields down more than 50bps today, to around 5.7%, from almost 7.5% last week….Draghi disappoints markets?????
In the longer run it matters not one iota what Draghi SAYS, it matters only what firstly he is willing to do, allowed do and does…in that order. What he SAYS may be a partial reflection of what he is willing to do…Maybe
Dan O’Brien’s article depressed me this morning. The next item on the agenda was a conversation with a colleague who says he heard from somebody that a survey (very vague on details) indicated that half of Irish businesses are at risk of closing. People are scared witless - they are not scared of austerity, they are scared of total collapse.
Unelected Draghi is wielding a big carrot and a big stick. What are we becoming? Did a democracy ever accept overt rule by a bank before?
ARticle by Dan is truly depressing particularly having read the editorial? They must not communicate with each other as the writer of the editorial shrugged off the market mayhem yesterday. Happily the markets regained their composure today.
The big question is..what turned Dan into a pessimist?
Dan’s article isn’t great.
Germany isn’t turning its back on Europe - its turning it’s back on debt slavery to banks.
What if Germany does back the ESM? Will it be used to prevent economic contraction in Europe or used to fill Goldman’s coffers?
Wish people would use their noggins.
Germany is doing the right thing by its own people. Unintentionally it is also doing the right thing for Europe.
Mario Draghi — saviour or executioner?
3 August 2012 Presseurop ABC, El País, Corriere della Sera & 4 others
The ECB will probably intervene, but states will have to ask for help first. The message delivered by the President of the European Central Bank raises serious reactions in the European press, which questions whether Draghi really has the power or not.
“Draghi bends” to the German will, protests ABC. The President of the European Central Bank has made any intervention by the ECB in the debt markets conditional on a request from Spain and Italy for help from the European financial stability funds. And the German government and central bank want this support to come attached with firm policy measures under European supervision.
For the conservative daily, Mario Draghi is “a reflection of EU powerlessness” –
The card game that the ECB seems to be playing on the instructions of the Member States of the North is totally unacceptable at a critical moment like the one we’re currently going through. [...] For the euro to be truly ‘irreversible’ [the word used by Draghi], it must be supported by strong and credible institutions under clear and decisive leadership – qualities that the ECB has not shown in the crisis.
Read On: http://www.presseurop.eu/en/content/press-review/2464731-mario-draghi-saviour-or-executioner
The World from Berlin
‘Vengeance for ECB Bond-Buying Will Be Bitter’
Investors may not have liked what European Central Bank head Mario Draghi had to say on Thursday, but it was the clearest indication yet that a plan is finally taking shape to reduce borrowing costs for Spain and Italy. Germany remains wary, though, and commentators say the outcome could be disastrous.
From your link…this bit is informative…
“”With Weidmann isolated, there is more: Not just the central bank heads from Austria, Luxembourg and Finland — who have often voted with him in the past — were of a different opinion this time. The second German on the Governing Council, Jörg Asmussen, was as well. It will be interesting to see how Weidmann positions himself in coming weeks. If he remains opposed to the plan, its credibility would be threatened. In such a case, hopes for a half-way peaceful late summer on the markets would be dashed.”"
The only element not covered is the pending judgement of the constitutional court.
The tone of opponents in Germany has become so strident, the silence of Merkel so loud, the reaction of the markets so confused and tame, that it seems that Draghi may, in fact, have succeeded in getting his ducks in a row.
An example of the stridency is th public expression by the secretary-general of the CSU, Dobrindt, thar Draghi is putting the interests of the country of his birth above his responsibilities under the treaties!
I don’t know about the markets being confused and tame…DOw up massively and it is probably not the jobs figures alone.
But as the FT Deutchland said…it may be a long summer.
Now if their Lordships say Nein? Or more probably place further restrictions on Angela…
Wonder if she is enjoying her holidays?
I would suggest people start thinking about the question of ECB sterilisation (or not - there is a practical limit of takers anyway) and how that will play out in Germany an the rest of the core.
No banking licence for bailout vehicles, but potentially unlimited (sterilised how?) purchases of short term paper - conditional on, er, being in a bailout.
If the core rolls over on this the ESM should not simply be viewed as too small because there is a commitment to just print the money the periphery wants to borrow - as long as that borrowing is considered necessary by Bailout Supervisory Central.
Some of the initial reaction to this was a tad petulant imho.
“Confused” in the sense that the markets first went in one direction and then the other; “tame” in the sense that neither move was that dramatic, the net effect being that Draghi, with one bound, was free and emerged with his credibility enhanced rather than terminally damaged as many, myself included, expected. The stridency of the opposition in Germany, and the increasingly irresponsible views being expressed smacks of desperation.
On the point made by Grumpy, the direction of the next moves at the technicl level seem likely to go in the direction of some mutualisation of short-term debt on the basis of conditionality and joint liability. Rajoy is hesitating at the edge of the pool but he will either decide to jump in or be pushed.
The general improvement in sentiment may be attributable to the markets beginning to discern that the leaders of the euro have tentatively found a basis on which to end the crisis.
By the way, going back to the editorial in the FT, I felt at first that I must be reading the wrong paper. Why the glowing endorsement of the moves by Draghi? The precarious state of the UK economy, perhaps, coupled with a growing appreciation that the City, by this stage, has very few friends (HSBC especially, in the US)!
Can the major UK banks credibly stay outside the new supervisory arrangements?
While it’s good on this occasion to have someone apparently on the inside feeding us the ECB PR line, there are limits.
Specifically on DOCM’s last point, he seems to be referring to the following:
““Mr Rajoy wants to know what the ECB has in store before he calls on the EFSF, while the ECB wants Spain to accept further conditionality before it starts to intervene,” said Nicholas Spiro of Spiro Sovereign Strategy.”
This does not allege that the ECB is setting the conditionality terms. It refers to the fact that the ECB is insisting that Spain should enter a programme before intervention, which will require more conditionality. It does not imply that the ECB will itself “set the conditionality terms”.
Honestly - blue in the face here…..
The private banking world want this:
1: A big European bank that they can buy bonds in and
2: That will be guaranteed by European/German taxpayers
They are not too bothered by how that private bank collects its dues because ultimately the tab is picked up by the European tax payer. And Draghi/ECB are working for this private banking system with their ESM proposals. They’re not really that bothered by conditionality but will go with it if it means the ESM getting started.
Bank G buy bonds in ESM which lends money to Spain. Spain doesn’t make payments but Bank G still gets repaid courtesy of the European taxpayer and the far-reaching debt collection powers of the ESM.
In fact the more money lent out by the ESM the more ultimately gets paid back to bank G - hence differing approaches to conditionality.
“The general improvement in sentiment may be attributable to the markets beginning to discern that the leaders of the euro have tentatively found a basis on which to end the crisis.”
I think what is of more interest to the markets is that the leaders of the euro have tentatively found a basis on which they can pump in enough funds to stop the whole thing collapsing before shorter redemption bonds are redeemed. Whether or not it is capable of actually ending the crisis is of less immediate significance to them.
Its just that the rest of the critters are simply ignoring reality. Debt re-payment can only come from your FUTURE income. So if your economic Model-in-Use mandates a geometric increase in income (to parallel the geometric increase in debt) - and this BAU model falters - as it is doing. Your skewered.
Asking folk to pay more out of a static or declining income stream is likely to produce a significant economic contraction.
Y = C + G + I + NX.
C is down. G is being forced down. I is faltering. NX is up a tad.
So our great experts say we MUST increase Y. Terrific. But they had better stop talking about it and do something physical. Oh! Therein lies the problem. Physical is tuckered out so the solution has to be a virtual one.
I sing, the moonbeams waver;
I dance, and my shadow bobs backwards and forwards.
While we are sober we are all happy together,
after we are drunk each goes his own way.
To pledge a friendship that is free from earthly passions
We must meet in the vast deeps of the clouds and in the river of stars.
German Pols Softening Stance on ECB Bondbuying
Heretofore, the Northern bloc countries, most importantly Germany, have firmly opposed ECB bond buying out of concern that it would lead to their bugaboo, hyperinflation. But now that the Eurozone is teetering on the verge of a full blow crisis, German politicians appear to be relenting. Per Bloomberg:
Members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of European Central Bank chief Mario Draghi’s plan to buy government bonds.
The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.
Norbert Barthle, CDU budget spokesman, said that German lawmakers will have veto rights over bond purchases by the euro- area’s rescue funds, which would operate in tandem with the ECB under Draghi’s proposal. The temporary fund “was created for a purpose and bond-buying is in the manual,” Barthle said yesterday by phone.
This is consistent with Ed Harrison’s call, which is that what the Germans cared about most was the periphery countries knuckling under and accepting more austerity. If any of the PIIGS accept more funds from the rescue facilities, it will be subject to a Memorandum of Understanding, which will strip them of much of their budgetary autonomy. Or to put it more bluntly, it will make them increasingly subject to the control of Germany and the surplus nations. So ECB bondbuying in isolation still appears to be subject to the pols’ disapproval, while in tandem with the rescue facilities, may be deemed to be acceptable. But notice this shift in stance is basically a very big trial balloon. Neither the finance minister Schaeuble or Merkel have come out and said the policy has changed, so this shift is looking likely but is not yet confirmed.
Note that the German government makes this change official, it’s a major shift, since it would allow the ECB to use its unlimited firepower along side the rescue facilities.
But the Bundesbank has not given ground:
Handelsblatt, in a front-page article, focused on the “isolation” of Bundesbank President Jens Weidmann, whom Draghi signaled was the only Governing Council member to oppose the bond-buying plan. The business newspaper said that Merkel is distancing herself from Weidmann, her former chief economic adviser, and asked: “How long can he hold out?”
This article by Seamus Coffey pins down clearly the essential elements of what has now been agreed (assuming that Weidmann is defending the honour of the Bundesbank rather than making a serious attempt to block the agreement by playing to the opposition in Germany).
Greece will be left go if it does not or cannot meet bailout conditions. Spain, Italy, Ireland and Portugal will be on life support for years to come.
The growth agenda has receded from the headlines but the lack of it will remain what matters.
The US added 163,000 jobs in July but the workforce shrunk by 195,000.
The growth of the population suggests that over 100,00 are added to the workforce every month.
US company profits have grown in recent years by cutting costs. That has run its course.
Adding new jobs is getting more difficult: in the 1990s, the average monthly new jobs in the best year was 320,000; in the last decade, the number fell to 210,000.
During the 1990s (specifically, from December 1989 through December 1999), the economy gained 21.7 million payroll jobs. By contrast, from December 1999 through December 2009, the economy lost 944,000 jobs.
221,000 US teaching jobs have been cut since 2010.
Since the launch of the euro in Jan 1999, 15.7 million net new jobs were created by 2008 in the EMU - - three times more than during the same number of years before the euro and around 2 million more than in the US during the same period.
High debt (private and public) will remain drags on economies while rises in aggregate demand will not create jobs engines that can have a big impact on unemployment.
In Ireland, in 1999 when jobs in the FDI sector peaked, US companies began to aggressively shift profits to low tax countries and by 2002, profits at US MNCs in Ireland doubled.
US tax strategies now create few jobs.
As competition from emerging economies rise, is it possible that some countries in Europe are living beyond their means?
Some people have had to incur severe adjustments in this brutal recession. Others in sheltered sectors have enjoyed the protection of insiders.
“It would be nice if (everyone could agree on the course communicated by Draghi on Thursday) so as not to limit the psychological effect of the announcement. But there was opposition from Germany, once again from Bundesbank head Jens Weidmann, who apparently was the only one on the Governing Council to vote against Draghi’s plan. Draghi isn’t the only one who is disgruntled. It is indeed inadvisable to sacrifice ECB unanimity. The Bundesbank head is fostering distrust where the opposite is needed….”
“With Weidmann isolated, there is more: Not just the central bank heads from Austria, Luxembourg and Finland — who have often voted with him in the past — were of a different opinion this time. The second German on the Governing Council, Jörg Asmussen, was as well. It will be interesting to see how Weidmann positions himself in coming weeks. If he remains opposed to the plan, its credibility would be threatened. In such a case, hopes for a half-way peaceful late summer on the markets would be dashed.”
Volatile week. Spreads spiked and equities sold hard after the ECB disappointed Thursday then rebounded Friday when Spain’s Rajoy made noises the country may officially ask for help. The key to Europe now are the political constraints on conditionality, i.e, more austerity, and German opposition to ECB monetization of “bad” sovereign debt. Watch Italy and Monti’s political support.
@some lite reading for all those who are sik of Sinn et al
ECONOMIST COMES CLEAN
For once, a senior economist has had the humility to admit how little economists know. If only there were more. Nobel Laureate Sir James Mirrlees gave a talk at the ANU http://crawford.anu.edu.au/events/content/video/?year=2012&id=2341 which goes a long way to exposing the truth that the conventional economics Emperor has no clothes, or at least not the kind of clothes that cover up the important parts of the anatomy. His talk is notable for its rare honesty, the kind of honesty that becomes possible, presumably, after you have won a Nobel prize and career success is assured.
“As competition from emerging economies rise, is it possible that some countries in Europe are living beyond their means?”
Yes, they are.
But many countries are living beyond their means because many people in those countries are refusing to share the means of living.
One wonders if that will change over the next few years. Personally I think it will. I think the Scandinavian model will come in for a lot of debate in the next few years.
” The key to Europe now are the political constraints on conditionality, i.e, more austerity….”
There is no reason the austerity formula cannot change. I think the scope is opening up for a broader definition of austerity.
One that includes tax increases. It is now up to the countries themselves, including Ireland, to present plans to live within their means without having to impoverish major sections of their societies.
The question is, do they have the stomach to do this?
Ireland doesn’t. Ireland would prefer to cosset the already well protected.
Today’s Sunday Business Post tells us that discussion on reducing the €2 billion allowances and expenses portion of the €15 billion ‘pay’ bill, will be deferred until September. A 10% reduction in such allowances, transferred to a carers budget, would make for significant improvement in the quality of lives of many hard pressed older people and their families.
It is regrettable that such ideas seem alien to the modern self declared leftist union organizations.
Excellent article by Seamus Coffey, though I think the conditionality may not necessarily be the standard ingredients rolled out to date. Italy and Spain will huff and puff but Draghi has made them an offer they can’t refuse. i.e To fund their respective States on short-term debt at reasonable rates.
I also wondered about the Weidmann vote/ strategy. Is he setting himself up for a political role as the saviour of the German people. One presumes that there would be a lot of latent support for such a politician.
I could nor disagree more. At the moment, Draghi is the good guy. He is trying to find a solution that will allow the European Project evolve and survive against the objections of narrow German nationalism (and a few allies).
If Draghi loses not only is the euro gone (maybe no bad thing) but peace and prosperity in Europe will be gone. We know what happens when nationalism wins.
@ Joseph R: Spot on comments Joseph - especially about Ireland. No one want to face into shared ‘austerity’ - least of all the elected ones. They face a potential electoral wipe-out if they attempt any kind of ‘balancing-the-books’ responses.
Presumably political Realism (of a purely nationalistic kind) will prevail in all this hubris. Politicians holding government office will do all in their power to ensure re-election. Un-elected individuals may propose all they like but in the end the elected ones will make decisions that suit them. It will be contry first, Europe second. It cannot be otherwise.
@ DO’D: That Mirrlees paper. Its sort of dopey absent any reference to an economic Model-in-Use - which I presume is Permagrowth. I would have to hear the audio version to be certain. In any event another laureate Fredick Soddy (Wealth, Virtual Wealth and Debt) got there before him.
Psycopaths…that a new one on me. I heard about the devil worship & shorting sub prime. You would be hard pushed to find anyone in finance not connected to Goldman. Even Warren B had a shareholding.
The FT reports that a political row has erupted in Athens after the former head of a big Greek state bank admitted to transferring €8m of personal savings abroad to buy a London property months before his Agricultural Bank headed towards insolvency.
It may seem strange in Ireland that there has been no use of the law to clawback pay and bonuses paid on what turned out to be phantom profits.
There are of course laws that could be be used such as evidence of reckless trading. However, there is a lack of will to take action.
On Spain, David Gardner writes in the FT:
When the government rammed through by decree last month’s €65bn austerity package, Mr Rajoy (prime minister) was absent from parliament. When he announced the measures earlier, each cut was rapturously applauded by government MPs, one of whom greeted benefit cuts for Spain’s legions of unemployed by saying que se jodan (let them screw themselves).
While few question the democratic legitimacy of a government with a majority in parliament, many do question its democratic sensibility – and it surprised no one, except perhaps the PP, that within hours this contemptuous epithet turned into a slogan rallying protesters against the cuts all over the country.
Mr Rajoy’s style of government is another problem. Despite his absolute majority in parliament, he prefers to rule by decree. Oddly, for someone who favours centralised and secretive control, he has three competing voices on the economy: Mr Montoro at the treasury, former Lehman’s banker Luis de Guindos at the economy ministry and Alvaro Nadal, his German-speaking adviser.
Gavyn Davies has an interesting take on the breaking of “the ultimate euro taboo”; the acceptance by the ECB - through Draghi - that the markets are demanding a premium against the risk of the euro breaking up or, at least, one or more countries being forced to leave.
It is a curiously incomplete presentation (although a further contribution is promised) in that it does not deal with the causes of the imbalances which give rise to the Target 2 balances. The most significant at this stage, it seems to me, is the self-fulfilling impact of the risk in question and the resulting flight of capital. (An egregious current example - although not impacting on Target 2 balances - would be the transfer of €8 million by the head of a failed Greek state bank to buy a property in London).
It is clearly Draghi’s intention to break this vicious circle. Monti has now gone on record to say that Italy has not yet received one euro in assistance and is seeking moral rather than financial support (!) The Bavarian minister for finance picks this moment as an appropriate one to advocate Greece quitting the euro.
To what purpose. European welfare states with universal payments, retirment at an early age and defined benefit pensions for insiders are unaffordable. Tax rates are too high, debt levels are too high. Rally all you want but it won’t change baisc maths.
Is Sweden unaffordable? There is a way to do it. You provide welfare within your tax intake. But governments around the world have been reducing that tax take all the time.
But Ireland cannot afford its current welfare system -that’s for certain. But dismantling or reforming it now is dangerous because any savings made won’t stimulate the economy but will just pay back debt.
Maybe the ultimate solution has to be looked at again: default, devolve (leave the Euro), devalue and deliver (I just liked all the de- words there)
The Swedes voted for high taxes. If any party in Ireland proposed levying Swedish income and property taxes on the average worker they would not get would not get with a asses roar of power. Instead they propose high levels of benefits, low levels of direct tax on most of the population to be financed by high taxes on about 20% of the population (i.e soemone else) and with the gap filled by sovereign borrowing. That model is broken.
Obama is going to campaign for raising taxes on the upper middle classes. Romney is going to win.
Unfortunately happened to read Money and Power about them. They filled the boards of corporate America with their people when money could be made from corporations and they’re doing something similar with governments now.
They mightn’t run the entire world but they do control quite a chunk of it.
as long as the blogosphere continues its bizarre infatuation with Goldmans, u can rest assured that the real problems, the real reasons and the real people responsible will never be properly understood. Congratulations for buying into the myopic myth and bullsh1t.
Ah I dunno. That’s a bit harsh. It’s like all these things the truth generally lies somewhere between the extremes - not as powerful as I think and not as benign as you think. I want to see how their medal predictions for the Olympics work out.
‘ Goldman wasn’t the only player racking up huge trading profits - only the most successful. In fact, one of the sorriest consequences of our financial system is the toll exacted on the legitimacy of providing great rewards for great contributions. Finance certainly contributes to prosperity, but the vast wealth secured in recent years by a small number of financiers does not map onto a commensurate increase in their economic productivity. They haven’t created or financed new industries or turned around failing companies. Rather, they have used subsidised borrowing to leverage the returns of questionable schemes, secure in the knowledge that if things go wrong the authorities will step in, trying to shore up asset prices or prop up ailing counterparties. The sharp rise in income inequality at the top of the scale in the twenty-first century owes much more to reverse Robin Hood regulation than to a small decline in personal income taxes’
‘I believe the European debt Bubble has burst – and this would no doubt be a momentous development. For years, European debt was being mispriced in the (over-liquefied, over-leveraged and over-speculated global) marketplace. Countries such as Greece, Portugal, Ireland, Spain and Italy benefitted immeasurably from the market perception that European monetary integration ensured debt, economic and policymaking stability. Similar to the U.S. mortgage/Wall Street finance Bubble, the marketplace was for years content to ignore Credit excesses and festering system fragilities, choosing instead to price debt obligations based on the expectation for zero defaults, abundant liquidity, readily available hedging instruments, and a policymaking regime that would ensure market stability. Importantly, this backdrop created the perfect market environment for financial leveraging and rampant speculation – in a New Age global financial backdrop unsurpassed for its capacity for excess. The arbitrage of European bond yields was likely one of history’s most lucrative speculative endeavours’
@ Bond, Eoin Bond
Thanks - I think the point is more they’re doing the opposite to what they advise others to do. But I accept your point.
Still don’t know what you do if you have those 2016 Italian bonds - they’re bound to drop fairly precipitously soon. Even though there might be short term profit in it couldnt you be left with a pretty worthless asset if the ECB stop buying them?
To be honest though. I’m out of my depth. I’ll stick to comic book good vs evil - its less stressful on my brain than all this complex stuff.
But their track record is awful. Look at fixing the Grrek books, look at the subprime crap, look at Facebook IPO.
They’re just not moral people. What really scared me was Blankfeins comment about doing god’s work. That’s scary stuff….we’ve seen enough of religious fruitcakes in this country to know how bad things can get
“But their track record is awful. Look at fixing the Grrek books, look at the subprime crap, look at Facebook IPO.”
What does “track record” mean? The decisions they made for their own investments, or the stuff they sold to others?
1. Goldmans was one of the few banks that saw the mess that subprime was, and avoided losses for the most part themselves. Yes they sold it to investors, but many of those investors (the Germans Landesbanks in particular) couldn’t get enough of it. They were begging the likes of Goldmans to sell them more and more (I know this for a fact).
2. What involvement did they have with the Facebook IPO? Wasn’t it Morgan Stanley that was running it? Goldmans were an original investor, that’s about it I think.
3. The Greek thing was without doubt dodgy, but was, apparently, completely legal at the time, and only makes up around 1-2% of Greek GDP. Anyone who thinks that transaction led Greece to where it is today needs to learn how to add.
On the Greek tbills - it’s the Greek banks buying, using ELA. Already fully agreed with the ECB.
On the Italian bonds, you’ll be left with a “worthless asset”? Slight exaggeration there, and given that they’re running a primary surplus, their problems look much more liquidity driven than solvency based.
My take on the Facebook thing was that they had bought a lot of shares, became aware of the Q2 estimate cut but kept that from their clients and instead offloaded their shares shortly the initial offering. I might be wrong and apologise is I am.
The subprime issue really was based on some of the testimony at congressional hearings - again the issue related to advising one thing and doing another. There was a lot of nasty stuff in that - I think I remember how some pension fund was advised to buy into assets that Goldman knew to be duds and were left broke.
Look - as I said before I think the truth is somewhere between our two positions. A lot of what they do just seems unscrupulous. I don’t think anyone could argue that they came out well out of the subprime mess.
The Greek stuff just can’t keep going on - there’ll have to be a moment when the govt just can’t raise the cash any more. That moment must be coming soon. I base this on nothing other than a hunch to be honest. The mood music from Europe is pointing to an imminent crisis. It’s more when than if I think now - and I think that could be soon.